By Jody Ellis
The end of the year means tax season is right around the corner—but don’t wait until January 1 to start thinking about how you can save money on this year’s bill. There are three concrete actions you can consider if you’re looking to pay fewer taxes and make your personal and professional finances stronger. Elliott Tracy, CPA, a senior manager with Jones & Roth CPAs and Business Advisors in Oregon, describes how some taxes can be offset through a combination of the steps described below.
Business expense deductions
“If it’s the end of the year and you’re considering a purchase of a large piece of equipment, consider whether or not it’s best to buy that equipment in December, when you can depreciate the equipment for that tax year, or if it would be more advantageous to wait and purchase it in January, when it can be used for the next tax season,” says Tracy. “Sometimes it is beneficial to accelerate deductions in the current year, and sometimes it’s better to defer to the next year.”
How to determine whether deductions should be accelerated or deferred depends on many factors, one of which is the state in which you do business. “In the state of Oregon, we tell a lot of dentists that for every dollar they spend which they can potentially deduct, their taxes will go down by thirty to forty cents on the dollar,” says Tracy. “So there are times you have to review your overall year and determine if it’s better to pay the thirty to forty cents in tax, or to spend the dollar and get that tax reduction. Some states don’t have an income tax, but they may have a gross receipts or sales tax, and all of this must be considered when considering deductions.”
There are also ways to benefit from equipment or practices already in use. Tracy notes that if a dental office has a milling machine in their office, it might be eligible for what is called a Domestic Production Activities Deduction. “This is a federal deduction as a manufacturer,” he says. “You’re taking crown material, doing 3D imaging and creating a separate product that is essentially sold to the patient. It’s a nine percent deduction on your net income from this activity.”
Charitable contributions can also make a difference in your end-of-the-year bottom line. “Again, this depends on where your business is located, but some states allow for a credit as opposed to a deduction, which can sometimes be a dollar-for-dollar reduction and can make sense,” says Tracy. “If your state doesn’t have an income tax, then at the very least you can reduce your federal tax liability with charitable donations by the end of the year.”
While a dentist cannot deduct the time donated to a free clinic or other charitable cause, they can deduct all costs associated with that activity, such as supplies or airfare if they’re flying to another city or country.
Contributions to retirement accounts
“Other year-end considerations should include maximizing your retirement plan,” says Tracy. “If you have a 401(k) or other plan, you want to talk to your retirement planning team to make sure you have all the correct components in place. There are limits to the amount of money you can put into different plans, but you can certainly put that money in at the end of the year and still get the tax benefit.”
Tracy cautions that right now, tax laws are in a “wait and see” mode as the new administration works to change the current requirements. Until then, the knowledge that these potential deductions exist should help ease your tax burden.